Report warns of damaging impact of ‘perverse and unacceptable’ financial transaction tax

The pared-back financial transactions tax under consideration by 11 European Member States could cause “significant and lasting damage” to the UK’s financial services industry, a tax expert has warned.

In a paper for the Centre for Policy Studies, John Chown argues that much of the impact of the tax would fall on the UK, as it would apply to financial institutions outside the FTT zone where transactions are with counterparties with headquarters within the zone.

“It is therefore essential that the British government, together with other countries which are opposed to the FTT – primarily Ireland, Luxembourg, and Sweden – act quickly to ensure the proposed FTT is not introduced,” Chown said.

Austria, Belgium, Estonia, France, Germany, Greece, Portugal, Spain, Italy, Slovakia and Slovenia proposed the FTT to the commission last September.

The proposed FTT follows a previous EU-wide plan, which was successfully vetoed by the UK in December 2011.

The new plan would impose a levy of 0.1 per cent on stock and bond trades and a 0.01 per cent charge on derivatives trades. The proposal aims to raise between €30bn and €35bn a year, compared with €57bn under the previous plan.

The impact of the tax would be to drive financial business away from the UK, Lord Nigel Lawson said in a foreword to the paper.

“Belatedly conscious of this danger, the EU is now attempting to extend the FTT so that any transactions involving eurozone securities of any kind, wherever they are conducted, are caught by the tax. This extraterritoriality may well be illegal: it is clearly unenforceable. And the US has already made clear that it will have none of it.”

Any move which would drive business from London to New York would be “both perverse and unacceptable,” Lawson said.

Chown’s paper argues that as there are no collection agents in place for the tax financial institutions will have to perform this role themselves.

“This will require huge changes to all IT, legal and tax systems in all financial services companies in every jurisdiction of the EU. Faced with such a cost and burden, how many companies would choose to relocate?”

The British government is currently challenging the proposals in the EU court of justice. While the paper argues this is a welcome move, it is “not nearly adequate”.

Uncertainty over the impact of the tax will persist while the case moves through the legal process, Chown said. The case would probably not be settled before the intended January 2014 commencement of the tax, which would mean even if the appeal was successful “huge damage” would already have been done to the UK economy.

Should the UK’s case hold, the bureaucratic burden of reimbursing parties charged by the tax would be “extraordinarily complex”, Chown said.

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